Despite the optimistic subheading of my book, "Staying Positive Amidst Disorder", I'm a cynic by nature and so sometimes need to critically examine both the tone of my work and how its content is being interpreted by others. The last thing I want is for my writing to be seen as "punching left", inadvertently promoting crypto-conservative viewpoints like a Dave Rubin, Jon Haidt, Steve Pinker or their ilk. If you don't know I'm a deep progressive, my pieces on MMT (Modern Monetary Theory), UBI (Universal Basic Income) and identity politics could certainly be superficially interpreted that way. While I think the left's openness to novelty is a great strength, I don't believe ideas get a pass merely because they're new, exciting or challenge preconceived notions. Our passion for the new can just as easily lead us into error as to utopia - as it certainly has in the past.
So in that vein, I want to continue talking about MMT by looking at the criticisms I received for my previous piece on Reddit and Twitter. I try to be fair in what I write about any subject; my goal is not to "punch left", but to see if exposing young policy programmes to critique by outside perspectives can highlight what, if anything, they offer that's new. This is made challenging by MMT proponents constant and tactical shifts between description and prescription, between the desire to challenge existing narratives and to craft a radical vision of their own.
In short, I received two sorts of criticism for my contribution. First, that I misunderstood and misrepresented the case of Venezuela. Secondly, that I (alongside most economists) overegg fears of inflation in economies that are demand-constrained. The following tweet from Adelaide-based economist Stephen Hail is representative of the comments I received:
Responding to my critics
The Venezuela barb in my first post was in all honesty a low blow. Of course Venezuela is not literally a case study of MMT - I was making an analogy. MMT theorists have an account of hyperinflation as a product of political and ecnomic crisis, which is both fair and explanatory in the Venezuela case. They point out that hyperinflation (of greater than 50 per cent) has never occurred in a democratic country with a sovereign currency. But critics of MMT like myself aren't only worried about the most extreme case. By arguing that adverse consequences are only a concern in factually rare circumstances, MMT economists fuel my suspicion that they're unconcerned with persistent high inflation that doesn't reach crisis proportions. After all, there have been at least two episodes where annual inflation rates in the West era have exceeded 10 per cent, both with harmful effects for both the real economy and domestic inequality.
The Venezuelan economic crisis has unfolded in multiple distinct phases, and by focusing on only its final Act (characterised by the familiar combination of fixed exchanged rates, debt default, currency depreciation, corruption and hyperinflation), we gloss over the earlier phase of the unravelling which produced these conditions. Even before 2014, Venezuela had one of the highest inflation rates in the world (40-50 per cent); 'Dutch disease' caused by oil-fuelled spending was corroding the country's production base; and capital flight and hoarding constituted a full-scale "strike" by capital (which could not be employed productively domestically). This underlying dysfunction led to the later debt and balance of payments crisis, and it's this systemic dysfunction caused by loose monetary policy - not the hyperinflation at the tail end of the story - which I argue by analogy should be of concern to MMT proponents.
My flippant use of Venezuela is ultimately just a distraction. The core issue is inflation. When even the US Federal Reserve doesn't fully understand how to control it, MMT proponents make an extraordinary claim when they state it shouldn't worry policy-makers at all. Either inflation is indeed an undesirable side effect of monetary financing, in which case new spending is constrained to a few per cent of GDP (which we do already), or inflation is desirable side effect. I suspect that at the end of the day MMT proponents are comfortable with government finance via debt monetization - in other words, an inflation tax. MMT proponents want to do away with finance via bond auctions. But government bonds, as a method of financing, at their core constitute a lease of a real asset held by the private sector by the government; like taxes, they ensure that spending redistributes inefficiently held wealth to more productive sectors of the economy - something monetary finance doesn't do and actively undermines by eroding the willingness of capital to lend to the state.
Doing away with this real-world resource constraint, by permitting direct central bank purchase of bonds (i.e. printing money at the Treasury's behest), does not change the availability or distribution of real capital and labour assets of an economy. But increasing the money supply does serve as a kind of tax, reducing the value of savings and fixed-asset incomes, while increasing the spending power of debt-laden consumers and the competitiveness of exporters. There are well known pluses and minuses to an inflation tax - it's not a new idea - and if this is what the MMT solution to inequality looks like in practice then advocates need to be upfront about what they're proposing rather than selling a policy as if it had no downsides.
This is why MMT proponents need to throw in the 'jobs guarantee' idea: it's the escape valve that exempts their policy recommendations from any negative consequences. If government spending is unlimited, there's no reason MMT couldn't be used to fund corporate subsidies and massive tax cuts (in fact, this is arguably a valid description of post-GFC monetary policy). Modern economies are in fact demand-constrained as a result of inequality, and demand-side spending should absolutely spur higher growth and equity. The best evidence MMT proponents have is that supply-side QE has been neither inflationary nor stimulatory; their ideal outcome is that demand-side 'peoples' QE is also not inflationary but does a better job at stimulating growth. But monetary financing is not future-proof or self-correcting: if applied in the wrong circumstances, monetary stimulus would replicate the stagflation of the 1970s or the liquidity trap of the 2010s. It's also a lever that only ever works in one direction: switching between demand- and supply-side monetary stimulus might undermine the adaptive, anti-fragile features of modern economies and erode trust in the value of goods and services.
MMT is not synonymous with "far left"
Just because an idea new and radical doesn't make it progressive. With MMT & UBI, this is abundantly clear. MMT proponents as a rule don't possess a systemetic critique of the structure of capitalism - views of Marx in the MMT community seem to range from attempts at reconciliation, to bemusement or outright hostility. They want to tinker with the levers of finance without challenging the underlying strutures and private incentives that generate inequality in the first place. This is part and parcel of their effort to signal respectibility to mainstream economists, which manifests in a number of facets of their policy advice.
Here's a controversial opinion: a jobs guarantee, while certainly an improvement on the laissez-faire status quo, is a conservative policy. Let's be clear: if finance is truly unlimited, why not spend heavily on public infrastructure, universal free education and healthcare, public housing, or a guaranteed minimum income? What about those who are unable (the elderly, carers, students and disabled) or unwilling to work - particular those unwilling to dig holes for the government for minimum wage, or to move or commute to where these job programs will take place? I am all in favour of expanding public sector employment, but jobs guarantee is intrinsically liberal in two key respects: firstly, it is a poverty-alleviation program rather than an inequality-alleviation program; and second, it is 'ambition-sensisitive' in the sense that it only rewards those of good character 'willing to work'. A guaranteed income would have the same result on poverty, at lower administrative cost and leave people free to find productive meaningful work that suits their skills and preferences on their own. Except it offends the sensibilities of ambition-sensitive liberals, and is therefore policy non grata.
The failure of MMT proponents to deal meaningfully with inequality across the income spectrum is a consistent feature of centre, even centre-left, thinkers who see poverty and unemployment as the only fault with capitalist distribution. As a denial of (several) fundamental human rights, poverty is indeed *the* pressing concern of progressive economics. But inequality is additionally uniquely harmful to individual and social well-being at all income scales and I would argue that a poverty program anchored by a requirement to work would do little to improve the relative automony and self-confidence of the low- and middle-income scale, and may in fact reinforce harmful stereotypes and behaviours (cf: Elizabeth Anderson). MMT theorists seem uninterested in the overall progressivity of taxation, or in taxing capital more aggressively. At their most contrarian, MMT proponents also often take a highly critical view of taxes consistent with far right libertarian economics.
This failure of MMT advocates to address the distirbution of costs and benefits in society is hidden by the (very cool) data-informed sectoral analysis they produce. MMT breaks economic activity into its private and public components, to demonstrate that increased government spending grows the private sector:
So government spending can grow the economy. But how is that growth going to be distributed? MMT has no answers that I've seen other than saying "Look! A jobs guarantee! Everyone like jobs! We're progressives too!". Inflating away debt may very well affect the distribution of wealth in a society, but income and property differentials would only reproduce it in short order. In terms of reducing inequality, funding a jobs guarantee through monetary policy is functionally no different than asking business to employ more people out of the sheer goodness of their heart: it's short-sighted, counterproductive and unsustainable.
I'm sure many MMT economists are well intentioned and I'm happy to make use of their work in fighting back against the deficit hawks on the right. But transformation of the economic status quo needs to be smart, adaptive and selective about the sorts of policies we pursue, and by acting as if political and economic constraints don't matter, MMT does the wider left a strategic disservice.